Brexit: where are we now?

With just days to go until the start of formal Brexit negotiations, it is time to revisit our forecasts of what they could mean for the UK, Europe, and the international financial centres in which we do business. Although last week’s general election result has not lent any additional clarity to an already opaque process, there are some key themes that we can draw from the information available to us.

Britain

It is tempting to assume that the hung parliament result is important because greater influence for Labour, the Liberal Democrats, and other more pro-European parties might lead to a ‘soft’ Brexit. This is to misunderstand the real schisms in Westminster: whilst a shift towards a softer Brexit might be on the cards, it will not be because of Corbyn, Sturgeon, or Farron’s successor. In fact, the nature of the House of Commons means the opposition parties will remain relatively impotent if May can secure a reliable deal with the DUP to gain her majority. This is easier said than done, given the DUP’s deep unpopularity across the ideological spectrum, but I suspect pragmatism will drive a deal that will work at least in the short to medium term.

The real power-shift is from the Tory front bench to the Tory back bench, as May’s government finds itself in need of every single Tory vote on all votes of importance. Any potential rebel is a potential King-maker, and the back benchers know it. This shift is no less seismic in nature than a change in governing party, as the internal divisions within the Conservatives on the matter of Europe have been threatening to tear the party apart for years.

May will therefore have to balance the demands of the 80 or so hard-line Eurosceptics in her party with the slightly smaller but highly influential lobby of hard-line Europhiles, as either one could end her career as Prime Minister. Several political staff changes have already been made in the makeup of the Brexit Department that would suggest she is seeking to involve influencers in both camps (the risk of doing this just days before negotiations begin implies it was essential to keep the peace). The real dividing line, however, is whether Britain pursues membership of the common market – this is a binary choice and it is therefore all but impossible to find an answer to suit both camps.

If May fails this tightrope walk, which is entirely feasible, history would suggest that we could see another general election within the next nine months. This would of course be disastrous for Brexit negotiations, and the potential ramifications are too broad to consider or plan for at this point.

Throughout all of this, communications from the Cabinet to the Tory backbenches have so far suggested that Brexit policy remains unchanged, which most likely means leaving the common market altogether. Whilst May has proven she isn’t a good campaigner, her rise to power showed what a shrewd player of the back-room political game she can be. Until we see concrete signs to the contrary I would be tempted to assume Britain remains on course for May’s vision of Brexit, whatever that may be.

Europe

For a broad and pluralistic alliance, the communications coming from European leaders have been remarkably consistent. They express a strong preference for a soft Brexit, indeed one that mirrors the Norwegian arrangement and would likely not be classed by most Leave voters as leaving at all. They also repeat regularly, however, that for that to happen Britain must concede on the continuation of the ‘four freedoms’ which, because they include freedom of movement, will be politically untenable in the UK. As negotiations continue I suspect the lobbying of major European manufacturers, particularly in Germany, will help to make this apparent impasse easier to reconcile by encouraging European concessions. The EU may have a much larger negotiation team, but it also has even more diverse stakeholders to satisfy than May does, which is the fundamental weakness in its position. How long can the consistent messaging last when a major trade deal is on the line that will invariably benefit some members at the expense of others?

In the short term, key international financial centres (IFCs) that directly compete with London and the British Overseas Territories may continue to benefit from the uncertainty, with many businesses betting it is safer to structure inside the EU than outside of it. Malta remains the biggest winner on this front, with explosive growth in a range of different sectors, but all of them in direct competition with its British-influenced cousins.

As for the longer term, several commentators continue to suggest that Brexit may yet become a sideshow to some of Europe’s larger problems. The Eurozone project remains in some considerable danger, with the economies of Greece, Italy, and Spain causing significant stress on the monetary union. If any of these were to tumble into another crisis, it could have a much more profound impact on the continent than Brexit would, whether it hard, soft, or somewhere in between.

The Crown Dependencies and Overseas Territories

Generally, the Crown Dependencies and Overseas Territories are likely to weather the Brexit storm relatively well, as their independence and flexibility makes them agile enough to react to changing circumstances. Most of them also have global-facing economies, rather than economies tied closely to the EU. That said, some will come out better than others regardless of the way Brexit goes. Generally speaking, Jersey and Guernsey will be disproportionately impacted by any negative or positive consequences felt by London, as their financial service industries are more closely tied to the capital than those of, say, the BVI or the Isle of Man. Gibraltar, meanwhile, still has the potential to be the big loser in the negotiations, if Spain uses this moment of apparent weakness to involve the territory’s future in the negotiations. It may not happen, but the risk exists.

None of that has been influenced by the election. Where recent events have had an impact, however, is on the collective influence of these jurisdictions. A ‘strong and stable’ Tory majority with a clear mandate would have led to a stronger negotiation hand for May, and that in turn might have meant the needs of the overseas territories could have made it on to the negotiating table. With May scrambling to exert influence, as she will now be, the already low-priority needs of these small players could fall entirely off the negotiation team’s list of interests.

Alex Fray - Group CEO

Alex leads of all Boston Group’s operations. He is responsible for enabling group strategy, maintaining strong governance, financial stewardship, operations and infrastructure across the group.

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